Thomas Byrne asks how subsidising and in effect artificially increasing the price of a commodity like coffee can possibly help a country upgrade.

By subsidising the production of a particular foodstuff or non-food agricultural item you will induce overproduction, a fall in price and exacerbate poverty, the opposite of what was intended. As unsavoury as we may find the results, it would be better to let the market take its course.

I think I have condensed ByrneTofferings’ argument accurately but if I have slightly misrepresented it I can of course alter it.

The reasons I support Fairtrade are fairly complex and tie in with my views on how successful countries have developed and what are good strategies for countries seeking to develop.

If I went into the detail necessary, the only response I would expect would be tl;dr. So for the sake of brevity I think the best way to begin to discuss Fairtrade is to look to the reflection on capitalism of a 19th Century German.

No not Marx, Johann Heinrich von Thünen

Johann Heinrish von Whonen I hear you say. Well, he was a nineteenth century landlord who wrote the book The Isolated State.

In this book posited a thought experiment that was to form part of the foundation of Economic Geography.

Imagine a very large town, at the centre of a fertile plain which is crossed by no navigable river or canal. Throughout the plain the soil is capable of cultivation and of the same fertility. Far from the town the plain turns into uncultivated wilderness which cuts off all communication between this State and the outside world.

That are no other towns on the plain. The central town must therefore supply the rural areas with all manufactured products, and in return tit will obtain all its provisions from the surrounding countryside. [1826]

In this society productive organisation is going to be divided not just by class and by what is produced but also by space.

The cost of agricultural goods produced outside the city will consist of the cost of production plus the cost of transportation. As shown below an outer limit will be created beyond which it is uneconomical to produce a given good.

If we allow ourselves to imagine more than one agricultural item being produced, we can see that agriculture will divide itself into rings surrounding the city.

As land owners nearer the city will be able to extract a higher rent than those closer to the outskirts ,the agricultural production nearest the city will necessarily be the most profitable, those furthest away the least.

If a traveller were to set out away from the city in a straight line they would pass through a number of different rings, each producing something different, and crucially each using a different production system.

This microeconomy is a remarkably accurate model of what pre-industrial revolution society was like. Roads were rare in continental Europe and most grain was consumed within a 20 mile cart ride of were it was produced; cities without access to sea or rivers rarely exceeded 1,000 persons.

We have moved on a long way since then, however this spatial inequality and differentiation between economic sectors continues.

Inequality, development and space

Before the industrial revolution inequality was rampant. However, inequality was distributed equally across the globe. For example, 500 years ago Asia and Europe were economically speaking roughly equal, however since then spacial inequality has rocketed.

World System Theorists argue that capitalism involves spacial inequality because wealthy nations get more wealthy by exploiting the poorer. By engaging in capitalist development the poorer countries are aligning themselves in a periphery which is exploited by a core and semi-periphery.

Neoclassical economics contends that poor countries are only poor residually and that capitalism does not create their poverty. In fact it argues that the positive spillovers of the rich world make the poorer countries richer indirectly.

Von Thunen’s thought experiment offers a critique of both views.

Although it is evident that an economy must be divided into zones similar to those described in World System Theory, it is also clear that economic underdevelopment does not necessarily result from this.

As you move away from our theoretical town the type of production engaged in changes. Closer to the town it is more capital intensive but further away it is more land intensive.

The simpler production systems used on the edges of this economy imply a lower level of Smithian specialisation and lower productivity per worker. In this scenario, as with World System Theory, the periphery of this economy is most likely to have lower incomes precisely because they are engaged in commerce with the core.

Strategies for development and Fairtrade

Two strategies present themselves as a route to development, one is to follow your comparative advantage and to produce what you produce most efficiently. Essential to the success of this strategy is to move on from a sector when it begins to suffer from declining returns; that is to find an alternative leading sector in which a country has an advantage when inputs in the old industry begin to produce outputs that do not lead to development.

Another strategy relies on diverting the profits from the sector in which you have comparative advantage to enter a higher value-added industry which you are currently not specialised in. For example, South Korea used profits gained from agriculture, and other industries to subsidise the production of microwave ovens. Although they were originally producing microwaves at a loss, through learning by doing, increasing capacity and increasing returns to scale they created a new leading sector from scratch.

Both strategies have risks, by relying on comparative advantage a country can be held hostage because demand for a raw material can taper off. The second strategy implies the risk that the new firm will never become profitable and fold.

Returning to our coffee growers, it becomes clear that they are operating on the periphery of our global economy. Their impoverished state also makes it clear that their current niche is no longer capable of producing economic development.

Thomas Byrne’s logic dictates that coffee growers must leave the sector and seek employment elsewhere, the current price for coffee cannot sustain the current number of coffee growers.

There is little alternative employment available in Mexico, Peru, Ethiopia, Tanzania or Malaysia. This is why I support Fairtrade, by providing a subsidy Fairtrade provides a surplus which would otherwise be absent and provides funds to upgrade their production.

For example in Guatemala growers have been able to begin growing new crops to supplement their coffee production, this is not a great leap forward, but it is an improvement.

By providing capital to small producers and expertise in world trade Fairtrade can be a tool which can help create new sectors in previously stagnant economies.

Thomas is right that there are other things which need to change that can make a much larger impact than buying a different bar of chocolate.

In the rich world agricultural subsidies need to end and tariffs need to be scrapped.

Illegitimate debt needs to be dropped and countries must be allowed to follow the lead of Ecuador in unilaterally abandoning it where possible.

The tight constraint which World Trade Organisation, World Bank and IMF rules place on developing world policy makers must be loosened. They must be allowed the “policy space” which the developed world enjoyed.

All of these things would have a larger impact than Fairtrade, even if Fairtrade was to account for more than 0.5% of agricultural production worldwide as it currently does.

While there are better ways to help the developing world than buying Fairtrade it does not follow that it should be abandoned. Likewise, the problems of implementation described in this Adam Smith institute report are not convincing arguments against Fairtrade.

For example, at the moment only 10% of the premium paid for Fairtrade goes to farmers in the developing world, but this is due to an information asymmetry which domestic retailers exploit, it is not a reason to abandon Fairtrade.

Some companies like Cafe Britt roast all their coffee in the country where it is produced, something which Fairtrade is yet to take up. However, this is not a reason to abandon Fairtrade, it is another reason to improve it.

Unlike Thomas Byrne and the Adam Smith Institute I am unhappy to rely on the market to dictate the rate at which the poor world develops. Given the enormity of the problem facing the world we should embrace Fairtrade as a palliative even as we strive for a more solution effective too.